Israeli officials are set to formally discuss ending a contract to sell China a Phalcon airborne early-warning aircraft after the Bush White House voiced strong opposition to the plan.

Geostrategy-Direct, a weekly military intelligence newsletter, said yesterday that the Bush administration was “quietly approached” regarding Israeli interest in reviving the contract.

Israeli Phalcon AWACS in flight, aboard a Boeing 707 platform.

However, “the response by sources close to the White House was a warning not to even raise the Phalcon issue with [President] Bush or his key advisers,” the newsletter said.

Nearly a year after the Clinton administration pressured the Jewish state to drop a $250 million contract to sell an Israeli-built Phalcon AWACS plane to Beijing, both countries are prepared to sit down and discuss a formal end to the contract, Geostrategy-Direct said.

Israel’s decision to end the contract at the urging of the U.S. angered China, but Beijing agreed to Israeli demands to take a wait-and-see approach until after the November elections, to see if Tel Aviv could convince a new U.S. administration to permit the sale.

The final “nail in the coffin,” however, came in April, when a confrontation between Beijing and Washington developed after a Chinese fighter jet bumped an American surveillance plane in midair off the Chinese coast.

The April 1 incident caused enough damage to the U.S. Navy EP-3 that its pilot had to declare a “Mayday” and land. The Chinese F-8 fighter reportedly crashed and its pilot was killed, Chinese officials said.

A second F-8 sent up to harass and monitor the U.S. flight reportedly forced the American plane to land at an airbase on China’s southern Hainan Island, where it still remains.

The plane’s 24-member crew was held by Chinese military authorities for 11 days; they were released April 12.

The intelligence newsletter said China has “come to terms” with the notion that Israel will most likely never sell a Phalcon-equipped aircraft and therefore is ready to end the contract, but not without some Israeli concessions.

The dispute so far, the newsletter report said, is over cost. Israeli officials have reportedly agreed to pay China the full $250 million price tag of the contract. That would cover the $100 million China has already paid in advance and would also compensate for Israel’s failure to deliver the plane.

However, the report said Beijing wants at least $500 million in compensation for the canceled deal because Chinese officials believe the country should be compensated for each of the five years the government has had to wait for the Phalcon to be delivered.

“The Chinese said they could have bought comparable systems from Russia or Western Europe” by now, the report said.

The April 1 incident also heightened U.S. concern over past and present Israel-China military deals. Chinese fighters sent up to monitor U.S. surveillance flights have been filmed by aircrews sporting Israeli-made Python 3 air-to-air missiles — one of the more sophisticated AAMs currently in China’s air force arsenal.

The Israeli Phalcon radar system would have been mounted in a Russian-built Il-76 four-engine jet for China, but it can also be mounted inside Boeing’s 707, 747 and 767 aircraft, as well as U.S.-made C-130s and some Airbus models.